Luxury Retailers To The Rich: We Need You! (COH, FIVE, TIF, KORS)

George Leong: The shares of luxury stock Coach, Inc. (NYSE:COH) plummeted by more than 14.0% last Wednesday. The stock is down 35.0% from its 52-week high, as the retailer of high-end designer handbags and accessories is struggling to achieve the sales growth that helped to drive the stock from the $2.00 level in 2000. Revenue growth in the second quarter was a muted 3.8%.

In the high-end retail sector, Coach is facing some spending slowing at its factory stores; if not for its strong sales of 40.0% year-over-year in China, the growth would be lower, according to the company. Same-store sales from China grew at double digits, while they declined 2.2% in North America. The growing importance of Asia is critical, since Coach owns and operates 402 stores in Asia. (Source: “Coach Reports Second Quarter Earnings Per Share of $1.23,” Business Wire, January 23, 2013.)

The showing from Coach indicates the current stalling in the luxury brand stocks in the retail sector, with the higher-end consumers appearing to be cutting back on spending.

Have you ever wondered how billionaires continue to get RICHER, while the rest of the world is struggling?

"I study billionaires for a living. To be more specific, I study how these investors generate such huge and consistent profits in the stock markets -- year-in and year-out."

The retail sector continues to be a difficult place to make money, and it requires careful attention and monitoring. There are trades to be made, but you need to be selective.

Discount and big-box stores continue to do very well, and in my view, they continue to be the space in the retail sector to make money.

The successful initial public offerings (IPOs) of Five Below, Inc. (NASDAQ:FIVE) in mid-July demonstrated the continued strong appetite for discount retail stocks.

Luxury retail stocks had been on a tear in 2011, but they have lost some luster amongst investors in the retail sector.

Luxury jeweler Tiffany & Co. (NYSE:TIF), after beating Thomson Financial consensus earnings-per-share (EPS) estimates in three straight quarters, has fallen short in the last four consecutive quarters, including a 22% shortfall in the fiscal third quarter based on Thomson Financial consensus estimates.

While Coach and Tiffany face some growth issues in the retail sector, you cannot say the same for high-end clothing retailer Michael Kors Holdings Limited (NYSE:KORS), which is estimated by Thomson Financial to report sales growth of 54.3% in fiscal 2013 and 31.3% in fiscal 2014. Michael Kors beat on Thomson Financial EPS estimates by an average of 63.1% over the past four quarters.

The stock debuted on December 15, 2011, and it doubled in price before the recent weakness. Based on its operating results, Michael Kors could be a special stock going forward.

Chart courtesy of www.StockCharts.com

The key to investing in the retail sector is to search for a company that offers some sort of niche or a unique product that differentiates it from its competitors.

The luxury retail sector stocks are a niche that has a growing target market with the newfound riches in the BRIC countries (Brazil, Russia, India, and China). These stocks tend to have strong global brand awareness and are sought after by both the newly rich and the old money.

In the short term, the money in the retail sector will likely be made with the discount and big-box stocks, while the high-end retailers wait for the wealthy to open their wallets.